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RBI to cut repo rate by 25 bps on 2 August: HSBC

LiveMint 27-07-2017PTI

New Delhi: The Reserve Bank of India (RBI) is expected to go for a 25 basis points (bps) repo rate cut in its policy review meet on 2 August as inflation is likely to have reached a new normal of 4%, says an HSBC report.

According to the global financial services major, inflation in India has fallen dramatically, and though the excessively low level it witnessed this fiscal is not sustainable, the rebound may not be too sharp either. A cut in key policy rates is likely as the country’s inflation differential with the world is normalising, inflation expectation is moderating and food prices are also receding, the report said.

“All considered, we continue to expect a 25 bps rate cut in the 2 August meeting. We expect the central bank to maintain its neutral stance, which we believe is consistent with moderate rate cuts,” HSBC said in a research note. The report noted that, inflation may already be at a new normal of 4 per cent. “We’ve said this before, and we have found new evidence since: India may have already become a 4% inflation economy,” HSBC added.

Beyond August, we see a risk of a further 25 bps rate cut later in the year if CPI inflation (without the direct impact of the seventh pay commission housing) continues to undershoot the 4% target, even in the second half of FY18. “For now, however, we see it rising to the 4% handle over the second half, but much will depend on reservoir levels and price of perishable food items from here on,” the report added.

The retail inflation, which the RBI mainly factors in while deciding interest rate, has declined to historical low of 1.54% in June. The wholesale price inflation for the month too has dropped to eight month low. In the monetary policy review in June, the RBI left key rates unchanged with governor Urjit Patel noting that the central bank wanted to be more sure inflation will stay subdued.

Despite inflation moderating sharply in April, the Monetary Policy Committee (MPC) decided to leave policy rate unchanged as a “premature action at this stage risks disruptive policy reversals later and the loss of credibility”.